Sunday, November 24, 2013

In his last press conference Mario Draghi said that the ECB was ready for negative deposit rates if necessary. His comments led to several European bankers rejecting this as a possibility (here and here). The comments of the Deutsche Bank and Commerzbank CEOs reflect on either their ignorance of how monetary policy works or their fighting against an ECB action that could make their lives harder (and their profits lower).

Martin Blessing from Commerzbank argues that "too much cheap credit could lead to future crises" and he concludes that he does not know "how too much cheap liquidity can solve a problem that was created by too much cheap liquidity." This argument has now been wrongly used for 5 years, I thought that by now we would have learned that this is the wrong analogy.

Fischen from Deutsche Bank complains that setting negative interest rates on deposits at the ECB would be like "penalizing banks". And this "will later be felt in a painful manner so that's what I've been warning about" (a threat?). This is the usual argument that banks are so important that you cannot do anything that annoys them. But what if negative interest rates are the right equilibrium value? In what way are we penalizing banks? Banks can go and invest their funds somewhere else if they find that this is not a competitive rate. In addition, it is not uncommon to have these CEOs arguing that what the Euro zone needs (in particular countries in the periphery) is a large reduction in wages. I guess this is fine. "Penalizing" workers is ok because they do not pose any systemic risk to the economy as a whole.

Antonio Fatas

I am the Portuguese Council Chaired Professor of European Studies and Professor of Economics at INSEAD, a business school with campuses in Singapore and Fontainebleau (France), a Senior Policy Scholar at the Center for Business and Public Policy at the McDonough School of Business (Georgetown University, USA) and a Research Fellow at the Center for Economic Policy Research (London, UK).